The results highlight the contrasting performance of state and private sector lenders in India. During tough spells in the economy, loans made by state-run banks, which account for 70 percent of the market but whose lending decisions are not always driven by purely commercial factors, are more likely to fall into default.

Many government-owned lenders are exposed to the beleaguered state electricity boards, troubled power and infrastructure projects, and debt-laden firms such as Kingfisher Airlines (KING.NS), Air India and Deccan Chronicle.

ICICI posted a forecast-beating net profit for the July-September quarter of 19.56 billion rupees, compared with 15.03 billion rupees a year ago.

By contrast, PNB's net profit fell 11.5 percent in the same quarter, with bad loans as a percentage of total assets rising to 2.69 percent, from 0.84 percent a year ago.

"It is difficult to say whether the worst is over," said K. R. Kamath, Chairman of Punjab National Bank (PNB), India's second largest government-owned lender by assets.

"It is a reflection of what is happening in the economy. It all depends how the economy behaves in the next 3-6 months," he said.

Bad loans at Indian Overseas Bank(IOBK.NS), a smaller state-run lender, rose to 2.25 percent from 1.21 percent a year ago, it said on Friday, sending its shares down over 8 percent.

India is battling high inflation, a yawning fiscal deficit and flagging growth amid political paralysis. Ratings agency Standard & Poor's has said the country faces a one-in-three chance of a downgrade over the next 24 months.

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Infrastructure and power projects mired in land acquisition hurdles and corruption scandals have already started to pinch banks, which are either restructuring loans to these projects or classifying them as bad. Most private sector banks have stayed away from project financing.

"In general, private sector banks have a larger proportion of retail assets. Retail assets, in terms of quality, have been stable and their performance has been good," ICICI chief executive Chanda Kochhar told reporters in a post-earnings call.

The ratio of bad loans at ICICI dropped to 0.78 percent in the September quarter compared with 0.93 percent a year ago.

ICICI aims to grow its domestic loan book by around a fifth in the fiscal year ending March 2013, led by consumer loans and working capital, and will be particularly cautious in unsecured retail lending and project finance.

Its net interest income - the difference between interest earned and interest paid out - rose 35 percent to 33.71 billion rupees.

Analysts had on average estimated ICICI to make net profit of 18.8 billion rupees, according to Thomson Reuters I/B/E/S.

ICICI shares have risen nearly 60 percent this year, outpacing 45 percent growth in overall bank stocks and the broader Indian market's 23.4 percent gain. Its current market value is close to $23.3 billion.

State banks including PNB and Indian Overseas Bank have lagged the broader market and their private peers. They have risen nearly 3 and 9 percent respectively this year.

(Additional reporting by Manoj Kumar in New Delhi; Editing by Daniel Magnowski)

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